07/12/2006
This morning I read an "interesting" article written by a "Mad Money" man who likes to shout out his opinions over the tube. This article talked about the recent proliferation of Exchange Traded Funds (ETFs) as if it were a bad thing for investors.
In his article, he made the ludicrous statement that the reason he likes mutual funds over ETFs is because they are diversified, and that this diversification helps investors to be "cushioned" against a market decline. The Mad Man goes on to say that when it comes to investing, diversification is the only "free lunch."
There are so many things wrong with this article that I won't even begin to tackle them all, but let's just say you can have a well-diversified portfolio of equities, and in a downward trending market all of them are likely to hand you big losses.
The one good thing about this article is that it got me thinking about the many Alert readers who probably still own mutual funds in their 401k, IRA or even taxable accounts. Well, it's the first half of the year is over — do you know how your mutual funds have done?
If you can't answer this question quickly, you aren't taking proper care of your money.
For the self-directed investor, it is imperative that you learn how to keep track of your money at all times. This means knowing the intimate details of every mutual fund you own. When I say the details, I not only mean the name, ticker symbol, sector, et cetera, although that information is a vital starting point.
Here I mean it is important for you to know about the performance of each of the funds you own, particularly within the context of the most recent bear market of 2000-2002, and within the context of the most recent downturn that began in early May and which continues today.
The following are a few considerations to keep in mind that will help you learn more about the mutual funds you hold:
1) Know the Vital Signs: To be able to gather any information on any mutual fund you own, you first have to know the fund's name, its ticker symbol, and the type of fund it is, that is to say, the "category" that your fund belongs to. Is it a large-cap growth fund, or is it a small-cap growth fund? Is it a domestic fund, or an international fund?
This may sound basic to more sophisticated readers, but you'd be surprised how many investors with a good level of general knowledge about the markets fail to know the precise details of the funds they own.
2) Know the Performance: The first half of the 2006 is over, but I'd venture a guess and say that many of you out there don't know how your mutual funds have fared so far this year. The first thing to know is how your fund has performed year-to-date. Then you should find out how your fund has performed over the past year, the past three years and even the past five years.
Are you holding a perpetual loser, or is your fund doing well? The only way to know this is by comparing your fund to the market in general, and specifically with what's known as that fund's benchmark. Basically, a benchmark is what your mutual fund's performance will be compared to. For example, the benchmark for a mid-cap growth fund would be the S&P 400 mid-cap index. You can get this information on benchmarks from various Internet sources, as well as from your fund's prospectus.
3) Have an Exit Strategy: If, after applying the first two considerations, you've determined that you are holding on to a losing fund, or a mutual fund that has woefully underperformed its benchmark even during bull markets, the question then is what are you going to do about it? Are you just going to continue to hold on in a vain attempt to get back what you've already lost, or are you going to take action in defense of your own money and shed that fund for greener pastures?
I know what I would do, and I know what subscribers to my Successful Investing advisory service have done for the past three decades. Why am I so sure about this? Well, because our investment strategies come with a plan. A plan that helps you shed those sour mutual fund lemons in favor of investments that are producing sweet returns.
Want to find out more on how we do this?
We've seen a ton of selling in stocks since last Wednesday, and one of the subjects that constantly comes up in my live appearances, in e-mails to my subscription services and on my radio show is just how best to play this market -- a market that is so volatile and so prone to dropping so fast.
Well, there is no doubt that the recent volatility in stocks has many investors pulling their hair out trying to figure out what to do. Hey, I understand this sentiment, but I really don't share it. The reason for my calm approach here is that I am not trying to fight the market by cherry picking the best stock or mutual fund that will buck the trend because of some new-fangled widget soon to come to market.
I'd rather let the market tell me what it wants to do, and then I will piggy back on it and roll in the direction that the market wants to take me. Right now the market is telling me that it has more room, much more room, to go lower. In response to its message, I've recommended that my subscribers put a small portion of their portfolios in a bear fund, that is to say, a fund that moves higher when the general market moves lower.
I've also seen a resurgence of sorts lately in the price of gold and energy stocks, even in the face of the selling in the Dow Industrials, S&P 500 and especially the tech-heavy Nasdaq. So, given the resurgence in both of these sectors, I've recommended to my subscribers that they take small allocations to both gold and energy ETFs.
So you see, our money is positioned to take advantage of the trends in place right here, right now. If these trends shift, or if the opportunity in the market moves to another sector, we won't hesitate to move our money where it will benefit us most.
It's a simple, yet extremely effective method of making sure your investment dollars are where they need to be.
For further details on how we stay calm amidst market angst, click here:
"Nationalism properly understood — as a man's devotion to his country because of an approval of its basic premises, principles and social system, as well as its culture — is the common bond among men of that nation."
– Ayn Rand
This past month I was struck by the huge display of nationalism that marked the World Cup soccer tournament. So many people rooting so vociferously for their nation's athletes got me thinking about the subject of nationalism in general, and in particular what it means in the American context.
I think that if we all really stopped and thought deeply about the basic principles of freedom and the right to pursue our own happiness that we enjoy in this country, then we'd all be jumping around waving the flag in ecstasy every day in celebration. In fact, it wouldn't be too dissimilar from the way in which those rabid soccer fans celebrate when their nation is victorious. I'd just like to go on record with all of my readers and say thank you, United States, for allowing me to be the person that I am.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.